IMF approves 2-year credit line worth $61 billion for Mexico

Mexico tumbles into recession - bad news for Obrador

WASHINGTON: The International Monetary Fund said its executive board had approved a smaller two-year lending arrangement for Mexico worth $61 billion, replacing the current flexible credit line of about $74 billion. It said the new arrangement would bolster market confidence at a time when trade uncertainty, a sharp pullback in capital from emerging markets and increased risk premiums posed continued external risks to the Mexican economy.

The Mexican government intended to continue to treat the arrangement as “precautionary” and planned to request further reductions in the credit line as external risks receded, IMF Deputy Managing Director David Lipton said in a statement. Mexico’s economy has been buffeted by uncertainty over the past three years due to the threat of trade wars with US President Donald Trump, and the credit line is viewed as an important stabilizer for its financial markets.

Mexico’s finance ministry hailed the arrangement. “The decision of the (IMF’s) executive board underscores that Mexico continues to meet all the qualification criteria needed to access, if required and without any conditions, the resources available through this instrument,” it said. The IMF’s new managing director, Kristalina Georgieva, said last month the organization would remain a “strong partner” of Mexico, following meetings with the heads of the Mexican finance ministry and central bank.

The IMF has recommended Mexico reconsider its position of limiting private companies’ cooperation with state-owned oil company Pemex, whose debt is weighing heavily on the government’s finances. Mexico’s previous arrangement was approved in 2017 for about $86 billion, but was scaled back to $74 billion in 2018 at the request of the Mexican authorities. In his statement, Lipton lauded the Mexican government’s efforts to set strong fiscal policies that stemmed the rise in the country’s public debt ratio, and a very tight monetary policy that helped reduce inflation.

He said financial supervision and regulation were strong, and the flexible exchange rate of the Mexican peso was playing a key role in the economy’s adjustment to external shocks. But he warned the economy still faced external risks, including volatility in global financial markets, increased risk premiums, reduced capital inflows and continued uncertainty about Mexico’s trade relations with the United States.

Mexico in recession

The Mexican economy, Latin America’s secondlargest after Brazil’s, tumbled into recession in the first half of this year and has since remained stagnant, according to revised official data released Monday. The downward revision confirmed the economy’s weak performance under leftist President Andres Manuel Lopez Obrador, who has struggled to deliver on his promise to kickstart growth since taking office in December 2018.

The economy contracted 0.1 percent in each of the first two quarters of 2019, after shrinking by the same margin in the fourth quarter of 2018, according to updated figures from the national statistics institute, INEGI. The news will again put Lopez Obrador’s government on the defensive, as it confirms the recession-defined as two or more consecutive quarters of contraction-began in the first half of the year. The economy then registered zero growth in the third quarter this year, INEGI announced.

The growth figures were adjusted down from preliminary data for all but one of the past five quarters. The figure for the first quarter of 2019 was revised up slightly, from -0.2 percent to -0.1 percent. The figure for the third quarter of 2018 - the last full quarter under former president Enrique Pena Nieto-was revised down from 0.8 percent to 0.4 percent growth. Year-on-year, the economy contracted 0.2 percent from the third quarter of 2018 to the third quarter of 2019.

Investor confidence down

Lopez Obrador won a landslide election victory in July 2018, and took office five months later promising to deliver economic growth of two percent for 2019 and an average of four percent across his six-year term. But he has clashed with the business community on a number of key issues, notably by cancelling construction of a new $13 billion airport for Mexico City that was one-third complete and replacing it with a rival project.

Investor confidence has also taken a hit from the grim financial outlook at state oil company Pemex, Mexico’s largest firm. Pemex owes more than $100 billion in debt, making it one of the world’s most indebted companies. Lopez Obrador’s government has plowed nearly $10 billion in rescue funds into the firm, but with few visible results so far.

US-Mexico-Canada deal

Meanwhile, US House of Representatives Speaker Nancy Pelosi said on Monday that a version of the USMexico-Canada trade agreement that House Democrats could back was “within range” but that they needed to conduct a final review. President Donald Trump’s administration has been pushing for the congressional passage of USMCA, which would replace the 1994 North American Free Trade Agreement.

Trump has repeatedly accused Democrats of stalling a vote on the accord to avoid granting him a political win. “We are within range of a substantially improved agreement for America’s workers. Now, we need to see our progress in writing from the Trade Representative for final review,” Pelosi said in a statement. House Democrats have voiced concerns over the enforcement of labor and environmental provisions. Labor unions have publicly voiced opposition to the accord amid worry that it will not protect US jobs.